Episode Summary

Tell us about yourself.

I’m a finance professor, and I’ve lived in the hottest real estate markets. I grew up in San Diego, I did my PhD in New York, my first job was at the London school of economics, and now I’m in Vancouver. So, this issue of foreign real estate buyers has always been close on my mind.

You’ve been in some real hot markets. How does Vancouver compare to those cities?

We have rough estimates of the number of foreign buyers in New York vs. Vancouver. Even if you look just at Manhattan, in Vancouver it seems foreign buyers are making up a larger fraction of the market, but looking at just Manhattan is wrong as New York is much bigger than that. Looking at foreign buyers relative to the size of New York Metro, they’re much, much smaller than the numbers that we see in Vancouver.

Are foreign buyers a problem in the Vancouver housing market?

Problem is too harsh of a term, but they are potentially a problem and could also be a benefit if the government reacts to this in the right ways. When the government does nothing, it can hurt the locals and this is what our research finds. If you imagine every person is an owner and cares about their offspring so they’ll leave any wealth they receive from their house to their offspring, then foreign buyers would not be a negative for a city. Suppose they show up and want to buy housing in your city. If you do nothing, you’re no worse off, but if they offer you enough money, you sell to them and you’re better off. In this simple world, there’s a capital gains channel which will benefit the people unequivocally. But the real world is not this simple. Ownership rates are high (around 65% in Vancouver), but we have a significant number of renters who, we find, are unequivocally hurt by foreign buyers. When foreign buyers come in, they drive up prices and take supply off the market, which causes rents to go up. We find that renters are hurt much more than owners benefit, and even among owners, not everyone benefits. For example, a 30-year-old family owns a two-bedroom condo and five years down the road they want to move into a bigger house because they want to have kids. However, they won’t necessarily benefit from capital gains on their condo because the house is much bigger and the increase in price will offset what they make. It’s the question of winners vs. losers: either the City benefits overall despite some people being hurt, or the average person, the City has hurt. This is what our research is all about. We wanted to build a realistic model of the city, with the right number of renters and owners, and the right number of young and older people, etc. within this realistic city, then ask do the winners benefit more than the losers are hurt? We find the opposite, when foreign capital comes into a city, takes supply off the market and drives up prices, the losers are hurt much more than the winners benefit. We estimate the typical renter in Vancouver is hurt by something like $900 per year, whereas the typical owner benefits by something like $300 per year. So, the results on average is Vancouver is worse off by this, but again the heterogeneous effects (owner vs. renter, young vs. old) are really important.

So, 65% of Vancouverites are owners and 35% are renters. Is this a normal percentage across the world?

For the US as a whole, this is pretty close. If you take a place like New York, the ownership rate is much lower. For places with large suburban populations, this is typical.

In terms of winners and losers, it sounds like losers are more drastically impacted in a negative way than the winners [are impacted in a positive way]; is there a more general takeaway here than foreign ownership is bad?

The second part of our paper is about how we can potentially react to this and take it from bad to good. There are lots of things we can do to offset these negative effects, so I don’t want to say that foreign buyers are bad in general. I think they’re potentially bad if we do nothing about it. There’s lots of talk about taxes or bans, but the obvious solution is to allow for more supply. In some cities this isn’t possible, like if you have mountains on one side and ocean on the other, you just cannot build more. If it’s possible to build more supply, foreign buyers do not have a negative effect on the market because they bring in money and capital gains. They’re potentially bad because they take enough supply off the market, but if you build enough extra housing for foreign demand then locals are not hurt as there’s still enough for them. Also, foreigners are bringing a lot of money into the local economy which will benefit profits of developers, wages of construction workers, etc., and this money will find its way into the rest of the economy.

So, the first question is if its possible to build more. Vancouver needs to decide if we want to build more. I personally think that Vancouver is still fairly low density; zoning laws are restrictive; there is lots of red tape developers must go through to build. Vancouver can build more, but this is not a decision for me to make, of course. We need to decide this as a city and if we allow for it, I think it’s the best solution to respond to these winners and losers that come out of foreign capital in the Vancouver market.

It sounds like its an issue of foreign buyers coupled with the fact that we don’t have room for expansion. Is there a market you’ve looked at where urban sprawl can exist where density supports foreign buyers, and they’re not having the same affordability issues?

We’ve only looked at New York and Vancouver, and in both of these markets I think it’s difficult to build more. But difficult doesn’t mean impossible. My view is Vancouver has the space to build more and is making a conscious decision to not build more.

You’ve lived in a lot of cities with bustling real estate markets. Do you find Vancouver in comparison, in terms of density and building, has more limitations? Does New York do it better?

New York and London are much higher density. If you walk just outside of downtown Vancouver, you see many neighborhoods with three-story buildings. The other thing I don’t think gets talked about enough is public transportation. New York has great public transport that allows people to live fairly far away but gets them to work in the centre of the city in reasonable times. If you go a half-hour outside of Vancouver, you see plenty of empty space or farmland. Some of that can potentially be built as housing, and that would greatly improve affordability. For that, you need infrastructure and a way for people to get to the city centre, etc.

One thing it sounds like your study found is there’s a much more negative impact in Vancouver because of foreign buyers than in New York. In the past 3-4 years, we’ve seen incredible appreciation in the real estate market here. Are foreign buyers a driving force in these price increases, and how much so?

I think they’re certainly part of it. In our models, they’re not the major part; they’re responsible for roughly 5-10% of the increase in rent prices. We don’t have great data on the number of foreign buyers; we assume they’re 10% of total real estate demand. Obviously actual price increases have been much larger, so we think foreign buyers are part of the driving force but not all of it. The Vancouver population has grown fairly fast over the past 30 years; I’m not sure about the last four years but over the past 30 it has grown much, much faster than Canada as a whole. We’ve had lots of immigrants, both from within and outside of Canada, and these are also driving forces that cause prices and rents to rise.

That percentage is pretty striking considering that in Spring 2016 we were seeing 3-4% increases month-over-month. The percentage of price increase because of foreign purchases is quite small.

It seems small, but perhaps the true number of foreign buyers has been much higher than we estimate from the data – the data is not great. If the number of foreign buyers is much higher than 10%, the effect on prices will be much higher. 10% is our best guess.

Have you accounted for foreign money in general? A lot of buyers in this market are getting money from outside the country for down payments.

We can’t say anything about that. We took the data that BC began calculating two or so years ago, and in that they identified roughly 10% of buyers having foreign origins. But you’re right; it’s possible there could be local people buying on behalf of their cousin abroad, or it could be someone in Alberta buying in Vancouver. From the point of view of a Vancouverite struggling to rent a place, these are all equally foreign buyers. For this reason, I don’t like the term foreign buyer; in our paper, we call them out-of-town buyers. So, the true number might be much, much higher; we don’t know.

Do you classify somebody waiting on residency as a foreign buyer or are they considered part of the immigration process?

Anyone buying in Vancouver and taking up space, so leaving that place vacant and not becoming part of the local labour market, we classify as foreign. That’s the key issue: if they come over here and work here, they are official immigrants. I don’t think of them as foreign buyers. Furthermore, if they come from let’s say Alberta, buy a condo in Vancouver, and immediately rent it out on the local market, this has no negative effects. It’s about someone outside Vancouver buying something local and taking it off the local rental market – essentially taking up the space. It doesn’t matter if they’re from Alberta or China.

Do you see the foreign buyers’ tax as good policy?

It’s better than doing nothing, but among all possible policies I think it’s a poor one. People have been buying real estate in Vancouver from abroad for many years. The foreign buyers’ tax only affects anyone buying going forward; anyone who bought in the past and is already taking up supply is completely unaffected. The second reason is it doesn’t encourage anyone to take these properties and put them on the rental market.

My colleagues at UBC and SFU proposed an alternative policy (this is Tom Davidoff’s policy): increase property taxes from about 0.5%-2%. However, most people would be exempt. Particularly, if you take income taxes in Vancouver, you can use them to offset property taxes. If you’re retired and used to pay income taxes, you can do the same. Another great thing is if you’re a foreigner and buy a property in Vancouver that you immediately put on the rental market, you can use that rental income to offset property taxes. The only people who would be affected by this tax is those who buy property in Vancouver, do not work in Vancouver, and take it off the local rental market. This is exactly what our model says negatively affects locals. The increased tax can go back to Vancouverites, or the government can put it into infrastructure, public transit, etc.

We first had Tom Davidoff talking about that policy last spring, in early 2016. Why do you think it hasn’t been implemented? The foreign buyers’ tax seems so blunt and misguided in a lot of ways.

I completely agree with you but I think that’s a question for politicians, not me. There’s a lot of policy inertia. I don’t know; maybe when the Liberals put in the tax they weren’t aware of this alternative policy and felt they needed to do something quickly and put in the 15% tax without too much thought. This is really about politics.

Have there been any surprises in the market’s reaction over the past 14-15 months since the tax was implemented?

I would have expected a bigger drop in foreign buyers. We saw a pretty significant drop immediately after the tax; it went from something like 10% to about 3%, then we saw prices drop by about 5% over the next six months, and now they’re back to roughly pre-tax levels. Prices have been fairly flat over the past year or so. The 15% tax is pretty big; I would have expected buyers to drop to 0; so, I guess they really, really want Vancouver real estate. We did see a drop; anecdotally, I think Toronto has received some of these foreign flows, and now Montreal. The fact that prices dropped but not by too much maybe isn’t that surprising because, like I said, this tax only affects those looking to buy going forward, not anyone who bought say over the past 15 years and has taken real estate off the market – they’re completely unaffected by this.

So how do you impact those people? The vacant homes tax is one thing that’s moving in that direction, right?

My favorite policy is this increase in property tax with exemptions that I mentioned, but I think a vacant homes tax is very similar, and in general I like the idea. In terms of implementation, the property tax policy is easier to implement. For the vacant homes tax, they’re going to have to hire an army of bureaucrats to show up at your house and figure out if you really live there; there will be a bunch of ways to try to get around it. But the property tax policy is super simple: You get income tax data from the federal and provincial governments, and figure out who has paid and who owes.

Moving onto density, where is the city failing and what are solutions for creating more density and more product?

I am not an expert on density and zoning so can’t give you a great answer. Just from living here and looking around though, it seems density is fairly low. From talking to people in the construction industry, it sounds like it’s a nightmare to build stuff. I would guess these are dimensions in which the government could make it easier to build, but this is just a casual observation.

We think of Vancouver as a global city like the places you’ve lived in and know well – San Diego, New York, London, San Francisco, etc. – but New York and London are financial centres, and San Francisco has a tech centre. Being in Vancouver, do you feel it is in the same category or is it more of an anomaly or stranger market?

It is more of an anomaly because although Vancouver is productive with industry, it’s not like New York or London with their finance industries or San Francisco and Seattle with their tech centres. Foreign buyers are perhaps playing a role, but there are very productive sectors paying high wages which drive home prices as well. Vancouver doesn’t have these booming sectors, but we see super high prices nevertheless. That’s the puzzling thing about Vancouver.

What do you think of the future of the city?

Oftentimes with economics, it turns out the best forecast is the simplest: Prices stay roughly where they are or grow at some moderate rate.

Five-wire Questions about Vancouver

What’s your favourite area in Vancouver?I live in Kits and love the beach; it reminds me of San Diego.

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